Bill Jamieson: Weathering the financial storm may require an umbrella

Published on 10/07/2011 22:31

WHEN even that inexhaustible ray of sunshine, Donald MacRae, chief economist at the Bank of Scotland, concedes that Scottish business has hit a "soft patch", you can be sure the weather's really turned.

MacRae may have missed his vocation as one of Britain's new jolly breed of TV weather forecasters, assuring us of "sun everywhere except for those large pulses of thunder sweeping the country. Best to take a brolly just in case". That, and a complete change of clothes.

The latest Bank of Scotland Purchasing Managers Index (PMI) still fronts with a distinctively upbeat tone. Scotland's private sector economy, it finds, expanded at a solid pace in June - the sixth consecutive month of growth. Finance minister John Swinney could hardly contain himself over this upbeat assessment.

But then the tone turns darker. We had, it reveals, one of the slowest rates of job creation in the UK. Lacklustre demand resulted in only a marginal rise in employment in June. New business showed the first fall for six months. Growth of output in the manufacturing sector was only moderate, while a marginal rise in new orders offset the fall in new business reported by the service sector. "Marginal growth in new business and job creation," MacRae writes, "suggest business is going through a 'soft patch' with subdued growth in the second quarter of this year."

But downbeat though this latest BoS survey reads, it is as nothing compared with the utter gloom that has descended across most of the forecasting profession.

Yesterday brought news of a further deterioration in the OECD's leading indicator readings for the UK. This chimed with mounting concerns that weak UK recovery is in severe danger, not just of a "soft patch" but of grinding to a total halt.

The OECD leading indicator, which attempts to pinpoint turning points in economic activity some six months in advance, fell for the fourth successive month in May and is now, in the words of Howard Archer at Global Insight, "getting down worryingly close to the 100 points level that indicates only flat activity".

Specifically, it stood at 101.3 in May, down from 101.4 in April, 101.8 in January and a peak of 103.8 in February 2010.

Last week economists moved swiftly to downgrade their forecasts after more disappointing data on construction and manufacturing. The National Institute for Economic and Social Research predicts that the UK economy grew by just 0.1 per cent in the second quarter, while Citigroup now warns that the UK economy shrank by 0.2 per cent in the April-June quarter.

And over the weekend came a survey of FTSE100 and 250 companies by accountancy giant Deloitte showing that boardroom confidence in the economic recovery is collapsing at its fastest rate for three years. One in three finance directors now believes the economy will fall back into recession.While I have no doubt that the decision of the SNP administration to bring forward capital spending has helped soften the impact over the past year, I just don't believe that Hadrian's Wall marks a sharp divide between misery to the south and sun-filled optimism to the north.

This is not to deny the successes of many Scottish exporting firms. But the idea of a Scottish economy bucking the slowdown now evident across much of the Western industrialised world is just not credible. The "business mood" is broadly similar, whether in the West Midlands or Strathclyde, and the commonalities well outweigh the differences.

There can be little doubt that the economy overall is well into what was identified months ago as a "soft patch" and is now morphing into something altogether more worrying.

Swinney, together with opposition politicians, talk of the need to switch to a "Plan B". The concern with this is how it would be perceived in financial markets where yields on government bonds in Spain, Portugal and now Italy have been rising. We share with these countries high debt and deficit ratios.

The best "Plan B" for now would be to concentrate on the measures outlined by the British Chambers of Commerce to help small exporters and to have better co-ordination of services on credit insurance and in mitigating non-payment.

Such help won't change the weather, but it could help many firms survive it.